Why Do VCs Still Doubt Solo Founders?

I think if you're going to build a company that attracts really high potential people, some of them believe it will be a launching pad for them. And learning to see that as a mark of success and not failure is a growth area for a lot of founders.

It's the week of October 6th. Welcome to the Learning Corner, a Precursor Ventures podcast.

Welcome to the Learning Corner by Precursor. I'm Nia Farnham and I'm joined by our GP and Managing Partner Charles Hudson, where we will be talking through the articles and Goodreads that caught our team's attention over the past week. Our first topic is a LinkedIn post by John Varonis from Unusual Ventures outlining three strategies he's seeing VCs chart down across the venture market. The first approach is to raise as much capital as possible, enabling you to participate in deals with less price sensitivity, though this requires finding LPs willing to accept lower returns and have lower cost of capital. The second strategy involves building a fund with a completely differentiated approach that founders recognize and value. This differentiation attracts founders who seek partners capable of providing more than just capital and negotiating terms for funding rounds. The third approach is a volume based strategy where you invest broadly and hope to pick winners over time while hosting flashy and fun events to make the journey a little bit more enjoyable along the way. John closes the post with a takeaway that the first route doesn't necessarily generate the venture returns LPs typically expect, and the third requires exceptional luck to succeed. The second is actually the most challenging strategy to execute effectively and not all funds will be able to do it well. So Charles, question for you. Do you feel like after looking at these that these three different lanes accurately describe the state of venture today?

I think it's a pretty good picture. And shout out to my fellow business school classmate John for his great post. There are, I think you know we've talked at length about the mega AUM firms and sort of the business they're playing in. I continue to believe as long as they can clear the cost of capital hurdle for their capital providers, it might be totally rational for those folks to put hundreds of millions or billions of dollars to work with those managers and they'll get the returns that they need. That's not for me to say. I do think the middle lane though is where all the tension is in venture and I would say those are the people who came from an era of more of a craftsman approach to venture who really want to stay that maybe you're a sector specialist, Maybe you like that 10 to percent seed ownership at reasonable prices. It's hard to pull that off. But I know a lot of people who are in this business were like, that's what I got in this business to do. And that's all I know. And I don't really want to change the third bucket. I would probably have maybe a slightly different view. I do think there are alternative strategies which are like, hey, I'm just going to try to get into as many good companies as I can. I hope I have a great one. And some of those people are price sensitive like we are, but other people I know are price insensitive and they're really running an access strategy. So if I were to say, to recast maybe what John said, I'd say there's an access strategy at the bottom which is like get to as many good deals as possible, however you define good. There's the middle classic seed early stage VC strategy which feels like it's under tremendous pleasure. And then there's the game that the 10 biggest firms in our industry are playing, which is massive, massive fund size to chase these hopefully super compounding companies.

And then it might be a little bit more of a technical question, but I assume objectively, if people are looking at the three different strategies, everyone would love to assume that hopefully that they would be playing in that second strata. So maybe it's a bit more technical, but what percentage of funds do you think they truly are embodying that second option, AKA the one that's building a long lasting founder first fund and then what percent actually are doing this very thing?

In reality, I think most, most VCs think they're in the second bucket. If you're in the first bucket, you know it. And as, as I've learned at Precursor, if you're in that third bucket, it's a really hard place to be because it's not a popular strategy with LPs. And I think a lot of the reason there's so much angst in Ventureland is a lot of people are crowded into that second lane. And as John mentioned right now that lane is under a lot of pressure. That's where kind of the, no, no pun intended, the rubber meets the road. It is that like the big firms are pushing down on you for ownership and they're picking off a lot of the attractive companies that would have otherwise been available. And the question is like, does that value proposition of being founder first services and being helpful, it kind of classes, does that still resonate with founders? Does that still the value prop that they're looking for from their capital providers. And I think the answer for some, for some of the like 9, 96 crack founders I meet in San Francisco is no, that isn't what they.

Yeah.

Isn't what they care about is what they value.

And so then if you're a fund manager who built up your entire career in that second bucket, what do you do at this moment in time?

Yeah, that is what you've done. Professional angst. It is akin to the venture capital industry having an industry wide midlife crisis. Many of us started firms or gotten to the business at a time where that's what you did. You built a founder first firm that stood for something that had values and the world was stable. And things have changed. And I think anyone who's not reexamining whether their fund model needs to exist and still fills a whole ecosystem is doing themselves and their LPs a great disservice.

And then my last question here is I guess for folks maybe are attempting to build on that second route, at what point do you actually know that you've done it? Because I think everyone only knows what they know when they're looking at their own fund and believes that they're doing the best route. And then also can you pivot and become that if you weren't that for the first two funds?

I think changing who you are as a fund manager is really, really hard. I talked to a limited partner earlier this week who said, well, how do you as a pre seed investor think about all these people who are pushing into your area? I said, well, they're doing it for two reasons. I don't worry about the people who are doing it out of necessity because their heart's not in it. You know, they'd rather be doing post product market fit companies with revenue, but those are too expensive, so they're coming. My experience has been you can't fake interests in pre product market fit investing. So I'm like, I don't worry about competing with those folks. As soon as they can get out of that category, they will. People I worry about are the people who are coming into pre product market fitness because they genuinely enjoy the work. Those are the people who are going to stick around. Those are the people who are going to do the hard work to figure it out. And I think in some ways it's kind of like if you're a B2B startup and you decide to become a consumer company, does that pivot sometimes work? Yeah, and it can work in the reverse too. You can have a slack but I'd say on average, most people start firms and pitch strategies that reflect what they're good at and what they enjoy doing. And that's really hard to change.

Well, our second piece is titled When Great People Leave. It's created by Richi Taparia on his substack Taps Notes. The piece centers on the painful reality that great people do in fact leave. And from a leader or founder's perspective, there are specific steps you should take to process, understand and learn from that news. The three steps highlighted are one Figure out if they can be saved. Riichi admits that the answer is Almost always no. 2 Understand the why, so why are we sitting down and having this conversation? And three handle that transition with grace. Ultimately, leading this event with introspection makes it possible to keep these team alumni as advocates in the outside world. And Rishi acknowledges that critical departures are most painful when teams are small, not like they ever get easier. I know that so much of our support for our portfolio is around talent issues, and team departures are something that will inevitably happen to every company along the road. What have been some of the common themes or most important learnings that you've seen?

I talked to the founders in our portfolio about this a lot, particularly because the set of people that are likely successful and necessary for your company in going from 0 to 1, not all of them are going to make it to the finish line. And some of them will leave by their choice, and some of them will leave by your choice as a founder. One thing I mean, I really like this post and I've actually sent it to a handful of our founders who've had departures recently. Sometimes you should be proud that you've built a place where people can use it as a launching pad for their career. I'll never forget when I was interviewing for investment banking many, many years ago, coming out of college, I'd met an MD at a big bank and I was interviewing with him and he goes, look, we're really proud of the fact that that a significant chunk of our analyst class goes on to be wildly successful executives in the future. I go, well, isn't that bad for the business? He goes, well, who do you think they call when they need an advisor or financial services and they take the things that they've learned and our best practices in our business and they take those learnings and lessons and habits with them to their new places and we're sort of seeding the world with our way of thinking. And I have friends at McKinsey who've told me the same thing. And so I think one of the challenges is, I'm telling you, a very good, long term, highly elevated story. When you're a lead product manager, who's your best person leaves and you're stuck? You're not thinking about the long term. You're thinking about the next release or the next version of the product and who's going to do that work. The other thing I will say is every time somebody leaves, in most cases, there are far more people who stay than leave. So if your star person leaves, everybody who stays at your company is going to watch the way you treat that person on the way. What do you say about them? How do you handle their departure? Because they're going to say, someday I might be that person. And if that person was treated poorly on the way out, or what does that say about what I should expect from this founder and this leadership team if I make a similar decision? And the flip side is, I think good departures require coordination from both parties. It requires the CEO and the leadership to be gracious on the way out, and it also requires the person leaving to be gracious and accommodating to some extent on the way out. I mean, we're coming up on peak season, which is January, because everybody goes home and sees their family and they go, how's work? And you're like, it's okay. Or I kind of want to do this other thing. New will come back in January and they're thinking, do I want 12 more months of this, whatever this is? And so I think it's one of those things where, like, the more it happens, the easier it is to appreciate it. But it's always hard in the moment.

One thing that I feel like I constantly talk about with super early stage founders, so think Pre Seed Seed is around the reality that there's not as much cash compensation to lure in wonderful talent and keep them to stay. Equity, of course, is obviously the carrot, but there's a long time to wait there. What list or really impactful things do you think founders should embody or take very seriously to keep good people there? And again, I totally agree with you. There are some things that are just completely out of your control and that's okay. But what things could you control?

My one big learning, having managed a bunch of high potential ambitious people, is high potential ambitious people need a constant diet of new challenges. And what I find is a lot of times if people feel like they don't see a way to grow in your organization and they're on an aggressive Ramp, they will find a place where they can grow. So sometimes the question is looking at, hey, this person was doing this job six months ago. Have they outgrown it? Or, wow, this person's a really good problem solver. Is there a new interesting initiative or problem? I will say this. When I worked at Google, it wasn't a very long stint. The era of Google, when I was there, I think they were very good at constantly taking these ambitious people and putting them on new projects and new projects that had no structure, that had, like, not been figured out. And that's just like a fun challenge for ambitious people is to go figure out something new versus, oh, I'm shifting the 19th version of this product that I've been working now in 15 years. It's kind of boring. And so I think it's a boundary. You have to be aware, like, what do I need to feed this person to keep this job? You know, my friends at Google, I say, oh, I've been here for 10 years, but I've had, you know, 10 different jobs, a new job every year, a new project, a new mission and groups. And I think that variety can make even an existing job feel more interesting.

And also balancing that with not burning out your best people too, because I think it's so easy to give as many projects as possible that are important and a little bit deeper to the people, you know, who can get it across the line. But I've seen this happen a lot with, like, my friends who sit in chief of staff roles is just constantly drinking from a fire hose, but never really being asked the question by their leaders, where do you want to see yourself next in the company? And like, how can I make that an easy transition and not like, you're completely underwater all day to never think about a future here at the company.

My first job when I worked at a U Tel, I had two managers used to always tell me, if you want something done, give it to a busy person. And I used to like me nuts. I'm like, that seems like, you know, at 22, I'm like, that seems like the opposite. Why would you give it to somebody over here who's got all this capacity? Like, oh, well, the busy person is the person who's in demand because they get stuff done. And I do think what you just said is very wise counsel.

Well, our last piece is a LinkedIn post by Itamar Novik from Recursive Ventures who discuss the counterintuitive dynamic from his perspective that has traditionally existed in venture capital investors not investing in solo founders. Despite numerous examples of successful solo founder companies, many venture funds choose to abstain from this structure, citing data that co founded companies consistently have better outcomes. Itamar argues that this is largely survivorship bias. Funds invest in more co founder teams, so the percentage of those performing well is naturally higher compared to solo founder teams. He highlights specific qualities that make solo founders far more attractive, like the ability to be more decisive, ability to maintain a clearer vision, you can operate faster and be more accountable with no finger pointing, to name a few. We've been investing in solo founders at Precursor for as long as the fund has been around. From your perspective, what repeat characteristics have you found that make those models work? And then what are some that make them far more difficult from your perspective?

I think any solo founder associate should also check out Julian Wisner's solo founder initiative. It's really cool. I usually have one question when I meet a solo founder. Are you on your own because you haven't found the right person, or are you on your own because nobody can stand? It's a highly subjective, totally unfair question. We have some solo founder outcomes where people have brought on a co founder a year after they started. Actually some of our best companies have this pattern. We have other companies where it's a solo founder, but they've built a really great founding team around them of early employees who have way more equity than they'd otherwise have. But they're non founders. And I've also met teams where I just said boy does this feel like a shotgun wedding. This just feels like the two of you got together to start this company because the person running it really didn't want to have to go out and answer the solo founder question. Really prefer a solo founder to a poorly matched team or a poorly configured team because the advantage I think of being a solo founder is you have so much more equity to distribute to other people and you can sometimes make offers that are just unimaginable for co founded teams. Second, I think sometimes if you have a technical co founder who is good but not amazing, you've tied up a ton of equity in someone who's probably unlikely to be either your V of engineering or your cto and that comes back to cause problems later. But look, the startup journey is emotionally taxing and stressful. And the thing I worry most about with our solo founders is the emotional part of the journey. At least with a co founder there's always the chance that on the day that you're low they could pick you up and the day that they're low, you could pick them up and you have this like, natural counterbalance. You have this division of labor. Not one person has to do everything. It's just easier, I think, to share the load if you could find the right person. Says the guy who started as solo defunds. Take this.

I was going to say that all checks out of being this great sounding board and emotional support if you have picked the right person. If you haven't, it's going to add far more issues than create value long term. I'm finding founders are asking me more now than ever before, basically, like, what they should do if they're so low. And I always wonder if they're asking me basically two different questions. Is it what looks better for fundraising versus what are actually the skills and gaps that I don't have that you think could be supplemented by somebody else that could help me long term? But it's happening more now than ever before.

Also, I think with AI tooling, you could do more as a solo. It used to be if you didn't have a technical role on, or you had to go on upwork, or you had to like find a friend to work on something, nights, weekends, you couldn't really make any progress. I think some of this antipathy towards solo founders comes from that era, which is like, hey, if you were just the random MBA student without a typical co founder, what did you really build? Or if you were the random technologist who's going to sell as we get to market. But I don't think we live in that world anymore.

I mean, even on the panel that we hosted for our pre seed bootcamp with our pre seed seed investor friends, all of them typically said in the past maybe they didn't love a solo founder team, but now that basically is off the table because you can accomplish so much, I guess. Last question, close out here, when someone is building a company and trying to decide whether they should wait for a co founder or not so just start building, what should they consider? Like, what are the top things you should just ask yourself?

I think the question is like, is there a critical skill set missing? So if someone told me, hey, I want to build like a nuclear reactor company, I don't know anything about nuclear energy, I'd be like, you probably should find a better person. If you told me, hey, I want to build this consumer service and I think I can bootstrap it, or I think I can build the community before I build the product. Well, you should get started building the community. Or if you're like, hey, I'm going to build. You know, in the olden, olden days of startups, a lot of startups got started with one contract with one customer. And that customer was funding the development of the D1 version of the product. And so I would hope that people wouldn't wait on a co founder to show up unless that person was absolutely essential and unblocked in making any progress whatsoever. Because I feel like the best way to attract a great co founder if you don't have one from the beginning is to make progress and have something to show someone. So that instead of saying like, I need you to build this, it's more like I'm giving you the opportunity to join.

Well, we are all out of time today. Thank you, Charles, for stopping in. Thank you, our listeners, for popping in as well. Please like and subscribe and we will talk with you all next week. Thank you. Bye.